Regulatory Re-Org

Tyler Cowen ponders the theoretical merits of a proposed re-organization of financial regulation.

The Fed is smarter than other regulators, the Fed can pay higher salaries, and the Fed has more independence.

...One important question is what kind of relationship would develop between the Fed and a new, unified office of prudential regulation. ...Even if there is consolidation of all the loose regulatory spokes (should credit unions really get a separate regulator?) into an oversight agency, we should somehow keep the Fed's special access to bank balance sheets. I'm not sure how the Paulson plan fares on that score.

I have a very cynical view of re-orgs. I thought that the Department of Homeland Security was a re-org that would set back homeland security for years.

When you get below the level of theory and look at actual implementation, re-orgs are all about petty turf wars.

When I was at Freddie Mac, re-orgs were constantly taking place, to the point where it was dangerous to take any time off. Twice I had to take a couple days off for personal business--once for a funeral and another time because I broke my wrist. Both times, I came back to having less responsibility and fewer people reporting to me. It was that ugly.

When you write the new org chart down on paper, you assume that the affected managers are going to act constructively and focus on the greater good. In practice, they will be more like a pack of dogs who hasn't been fed for two days that gets tossed a small steak.

All re-orgs create near-term dysfunction. Maybe some of them create some long-term benefits. But I think there is almost always an alternative way of obtaining those benefits more effectively at less cost. In a corporate setting, my guess is that 9 times out of 10 the problem that you blame on a bad org chart is really a problem of one or two managers who are messing up.

In the case of mortgage markets, the internal contradictions of regulatory policy are more of a problem than the execution of the policy. For example, you can't place a high priority on home ownership for the "under-served" and then act all put out when so many of these folks who can't afford homes wind up in foreclosure. I remember a few years ago a friend who was about to leave Freddie Mac muttering to me that the market was "over-served," which we now know was even more correct than he might have realized at the time.

I agree with Tyler that an independent financial regulator with a competent staff will do a better job than an agency that is constantly hectored and pressured by Congress. In fact, you can anticipate that whatever changes to financial regulation that do take place will be undertaken above all to satisfy the turf requirements of various Congressional Committee Chairmen.

Comments and Sharing

In my experience, the only reorganization that works is when a brilliant outsider becomes the boss, finds out who does and who knows what, and then creates a reorganization plan that eliminates most of the bureaucrats and back-stabbing climbers. Of course, this would never happen in government, where getting rid of a completely worthless employee takes a minimum of six months of hard work by the employee's supervisor. (Can you tell that I used to work for the federal government?) The combination of civil service rules, unions, and fear of lawsuits makes effective reorganization nearly impossible.

Two of the three reorganizations I've been through resulted in decreased overall productivity, much more work for the unappreciated talented and productive employees, much more authority for clueless clowns in middle and upper management, and more workers (usually inefficient ones) in management support positions.

The one successful reorganization I went through was at a small clinical laboratory with no bureaucrats and no unions. All the workers knew we were in trouble financially and supported the plan. That would never happen in a government agency.

Let's extend the scope of the problem with this re-org a little bit. How would you like to be an institution going through a regularly scheduled review right now, when the agency doing it has every incentive to justify its existence? Expect a few scalps displayed before this re-org gets executed.

Re-orgs meet the fundamental test of all public sector initatives - to be seen, visibly to be doing something. Whether they work or not is entirely irrelevant. Those things don't get measured, they don't get rewarded and therefore they don't count. And they are a gereat vehicle to advance the ambitions of those who most lust after power but least deserve it.

My 30 plus years of experience in both pubic and private organizations is that most reorganizations are done to avoid addressing management performance issues. When managers perform poorly or are impediments to a new organizational strategy, the most common form of addressing this issue is to re-organize the manager into a new area in hopes that if you can't correct the problem you can either isolate it or give it more supervision.

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